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Hedge Funds: Meaning, features, regulations, types, strategies.

Updated: Jan 26

Topics discussed in the article:

What are Hedge Funds?

Hedge funds are funds pooled up by a group of investors or institutional investors which are managed by professional fund managers to invest in a variety of assets to generate high returns. These funds are typically open to a limited number of investors and require a significant minimum investment.

It is often assumed as a risky investment strategy used by accredited investors

How do Hedge funds work?

Hedge funds work based on employing various trading techniques, driven by the types of securities and assets in which they invest. These encompass equities, debt, and derivatives like futures and options. Whether through stock market trading or private placements, these funds automatically diversify their trading approaches. For instance, futures involve the right or obligation to buy or sell an underlying stock at a predetermined price, date, and time, while options trading offers similar rights without any mandatory commitment.

Some of the securities where the hedge funds can be invested in are given below: It note- the specific securities invested in by hedge funds can vary widely based on the fund's strategy, objectives, and risk tolerance. Additionally, regulations and investment guidelines may influence the types of securities a hedge fund can include in its portfolio.

  • Equities

  • Bonds

  • Real estate

  • Currencies

  • Covesrtabile securities

  • Derivatives

  • Commodities

  • Private Equity

  • Private placements

  • Distressed debt

  • Structured products

In India, hedge funds are generally categorized under the regulatory framework for Alternative Investment Funds (AIFs) by the Securities and Exchange Board of India (SEBI).

Key Features of Hedge funds :

Hedge funds stand out from traditional investment funds due to several key features:

  • Exclusive Access: Typically available to a select group of high-net-worth individuals or institutions, hedge funds prioritize exclusivity based on regulatory requirements and assumed investor sophistication.

  • Diverse Strategies: Employing a variety of tactics like long and short positions, derivatives trading, and leverage, hedge funds aim to generate returns across different market conditions.

  • Flexibility: Unlike traditional funds, hedge funds have the flexibility to invest in a wide range of assets, including stocks, bonds, commodities, and currencies.

  • Performance-Based Fees: Hedge fund managers charge both a management fee (percentage of assets under management) and a performance fee, often tied to exceeding a benchmark or hurdle rate

  • Liquidity Constraints: Investors may face restrictions on withdrawing funds, and lock-up periods may limit immediate access, distinguishing hedge funds from more accessible investments

  • High Risk and High Reward: Known for aggressive strategies, hedge funds seek high returns but come with elevated risk, offering both substantial gains and losses

  • Private Partnerships: Structured as private investment partnerships, hedge funds have a limited number of partners pooling their capital

  • Complex Fee Structures: Beyond management and performance fees, hedge funds may feature intricate fee arrangements, including additional expenses and administrative fees.

Alternative Investment Fund Categories under the SEBI Regulations 2012 (effective 21 May 2012)



Investment Examples

Investment restrictions

Category III AIFs

Funds employ diverse or complex trading strategies, including the use of leverage through investment in listed or unlisted derivatives.

Hedge funds are open-ended funds for which no incentives or concessions are given by the government or any other regulator.

  • Cannot invest more than 10% of the corpus in one investee company.

  • Can invest in units of other Cat. I or II AIFs but not in units of other funds of funds.

  • Can leverage or borrow subject to consent from investors in the fund and subject to a maximum limit as specified by SEBI, provided appropriate disclosures are made as specified under AIF Regulations

Types of Hedge Funds In India

Here are some common types of hedge funds or strategies that fall under Category III AIFs in India:

  1. Global Macro Funds: These funds take positions in various markets based on macroeconomic trends and global events.

  2. Equity Long/Short Funds: Managers of these funds take both long and short positions in equities, meaning they buy stocks they expect to rise (long) and sell stocks they expect to fall (short). This strategy aims to profit from both market upswings and downturns.

  3. Event-Driven Funds: Event-driven hedge funds capitalise on specific events such as mergers and acquisitions, bankruptcies, restructurings, or other corporate events

  4. Quantitative Funds: Also known as quant funds, these funds use mathematical models and algorithms to make investment decisions. They may analyze historical data, statistical patterns, and market trends to identify potential opportunities.

  5. Arbitrage Funds: Arbitrage involves taking advantage of price differences between related assets or markets.

  6. Managed Futures Funds: Managed futures funds invest in futures contracts and commodities. Managers use trend-following or systematic strategies to trade commodity futures, currencies, and financial futures.

  7. Fixed Income Arbitrage Funds: These funds focus on fixed-income securities and aim to exploit pricing inefficiencies in the bond markets

  8. Multi-Strategy Funds: Multi-strategy funds combine various hedge fund strategies within a single fund for diversification and flexibility in the market.

Popular Hedge Fund strategies

  1. Long/Short Equity: This strategy involves taking both long (buy) and short (sell) positions in stocks. Fund managers aim to profit from both rising and falling markets.

  2. Event-driven: Hedge funds using event-driven strategies capitalize on specific corporate events such as mergers, acquisitions, or restructurings.

  3. Global Macro: Managers employing this strategy make investment decisions based on macroeconomic trends and global events, including interest rates, currency movements, and geopolitical developments.

  4. Quantitative (Quant) Strategies: Quantitative hedge funds use mathematical models and algorithms to make trading decisions. These models analyze historical data and market trends to identify potential opportunities.

  5. Arbitrage: Arbitrage strategies seek to exploit price differences between related assets or markets. This can include convertible arbitrage, statistical arbitrage, or merger arbitrage.

It's crucial to recognize that the effectiveness and popularity of these strategies can fluctuate, and individual hedge funds may integrate multiple approaches within their overall investment strategy.

A list of a few Successful Hedge Fund in India is as follows:

Name of the Hedge Fund Firm



Blackrock Advisors

$8.5 trillion as of second quarter 2022


Citadel LLC

$50 billion as of May 2022


Bridgewater Associates

$235.5 billion as of May 2022


AQR Capital Management

$145.5 billion as of March 2022


Man Group PLC

$151.4 billion as of March 2022


Renaissance Technologies

$121.8 billion as of March 2022


DE Shaw & Co LP

$128 billion as of March 2022


Tiger Global Management

$124.7 billion as of June 2022


Two Sigma Investments LP

$81.2 billion as of March 2022


Millennium Management

$341 billion as of March 2022


Elliott Asset Management

$83.5 billion as of June 2022


Davidson Kempner Asset Management

$44.1 billion as of June 2022


Lone Pine Capital Management

$35.5 billion as of March 2022


Baupost Group Asset Management

$31.6 billion as of March 2022


Point 72 Asset Management

$138.5 billion as of May 2022

Prasanna Laxmi R., Assistant Content Manager

An MBA student specializing in Finance, driven by a keen interest in exploring the complexities of finance to navigate the business landscape.


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